Business Valuation

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Valuation of a Business

What is your business worth? How do you value  a business , in this bog we will discuss valuation. If you are selling your business, you need to be able to accurately forecast revenue. This blog deals with a percentage ownership in your business. If you want to sell it 100% , you can figure the math based on a total sell out.

Revenues and valuation 

Typically if you want to sell a portion of your business, an entrepreneur will ask for a dollar amount based on percentage of ownership. Let’s say you want $100,000 dollars for a 10% ownership stake in your company.  This means you would need to provide accurate documentation that your business is worth $1M.  The math works like this: 10%  $100,000/ .10 = $1M n revenue. You will provide the last years sales. If your sales were $250,000, it theoretically would take you 4 years to get to $1M. Revenues and valuations are based on past revenues or current deals you have working. 

Earnings and Profit Office Expenses

If your company has $100,000 in profit then your earnings multiple would be 10.  We get 10 by dividing $1M/100,000.  Then what will happen is the earnings multiple of a like business can be applied to your business.  This is done as a comparison to see if this is a good investment and to understand the valuation.  Let’s say the earnings multiple for a widget manufacturer is 12. Using the Multiple of 12 X $100,000 the valuation comes in at $1.2M.  In this example the valuation is higher than your number at $1M. This makes sense for a sounder investment. 

See Cap rates for commercial properties.

 

Retail Tenants and Landlord Bankruptcy

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Retail Tenants and Landlord Bankruptcy

Summary taken from NREI

We are starting to see quite a bit of fallout regarding retail tenants and landlord bankruptcy. As  retail tenants experience more difficulties from COVID 19 such as government shutdowns and shelter in place orders business is greatly affected. Even though there is some lifting of restrictions, the damage being done will be long. As a result, there is a rise of bankruptcy filings by commercial landlords.  What should retail tenants do to protect their rights during a landlord bankruptcy?

Landlord files for bankruptcy

When a landlord files for bankruptcy, they can keep in place or reject it’s unexpired tenant’s leases.  Within the Bankruptcy code there are provisions regarding this that do not change the terms of a lease. If you are a tenant and are not familiar with bankruptcy law (most are not) a tenant can run the risk of losing lease rights.  The unprepared tenant could lose potential opportunities within bankruptcy to improve the position of its lease. The position would be via other tenants and creditors of the landlord. 

Assuming and Retaining a lease

To assume and retain a lease , the landlord must cure all breaches. All monetary breaches are done at 100 cents on the dollar.  Retaining income from tenants is of the upmost importance to a landlord in commercial real estate. This is especially important for leases signed before the pandemic. Before the pandemic, leases garnered higher lease rates in Austin. For you as the retail tenant, retaining above market lease rates is not that appealing.  However, the bankruptcy code requires landlords to cure all existing defaults prior to lease assumption. Some lease defaults such as janitorial services for tenants are not required to cure. Tenants are compensated for damages due to non payment of tenant improvements. Also damages can be claimed for not maintaining the property. Landlords can only assume a lease after adequate assurance of future performance is complete.

Renegotiation

Landlords must by law cure breaches. This presents a good opportunity for a retail tenant to renegotiate their existing lease for more favorable terms. The tenant may accomplish by carefully analyzing its existing lease. They should provide a detailed and documented list of the landlord’s past and ongoing breaches. The lease analysis should include “measurable money loss” from defaults and also important non-monetary breaches that negatively affect the value of the leasehold.

For more information regarding bankruptcy and commercial real estate, a retail tenant should contact a CRE attorney.

 

Office Rent Reduction

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Office Rent Reduction

During the COVID-19 dilemma , let’s chat a bit about some options for you as a tenant for office rent reduction. I was having a conversation with a colleague yesterday (5/28/2020) about this. They told me they have had 1000 requests for rent reductions.  Needless to say, this is alot of requests! During the government shutdowns whether it be federal or local, you still have a business to run. So, what happens when you can’t make your rent? How long can you stay closed?  What are your options?

Requests for rent reduction

Depending on the length of time you have been “forced to close” will depend on a request for a rent reduction. As you are well aware , other options exist such as PPP and CARES from the government.  Keep in mind a portion of these solutions are loans and you will have to pay it back with interest at 3.75%.  If you are in a retail based business, you can first go to the landlord. Ask them for rent relief. How much should you ask for?  You ask for a percentage reduction or a dollar amount.  The option of the two is up to you.  There is a catch, you may have to pay the difference at the end. Here is an example:

Your rent is $1000 per month. You ask for a $200 rent reduction for 3 months.  The landlord agrees , so you pay $800 for the next 3 months. What about the $600 that is not paid? In this example, if your rent is static (unlikely) you pay $1600.00 for your last month’s rent. If you are in a location with multiple tenants having issues, you may have more leverage. The same example works for office and industrial.

COVID-19 Lease provisions?

There will be discussions that will happen due to this recent scenario. Should there be a provision in leases from now on regarding business interruptions caused by a government entity? We have not seen any provisions drafted as of today. To understand if there is a lease provision available to you , your Broker can recommend a CRE attorney.  Brokers and agents are not allowed to draft provisions into a lease, only deal points that have been agreed to. The business interruption may include recourse you have in case your business is shut down when it is not caused by your business.  You may also have a conversation with your insurance company to see if they will underwrite a business interruption policy based on government shutdowns.

 

 

Grease Traps for Restaurants

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Grease Traps and Restaurants  | Overview

If you are a restaurant business, you should be familiar with grease traps. This is an important element for any food service business and can cost upwards of $10,000- $15.000 for a new grease trap. So why have a trap? This mechanism intercepts and separates grease and solids.  This solution allows grease free water to flow to the sewage lines.  It also can help prevent clogs and pipe back-ups due to hardened grease.  Water plant are not set up to handle grease in water. The system is connected to kitchen drainage and has nothing to do with restrooms.

Utilization

Commercial properties and of retail locations with have kitchens would utilize this solution.  You would also require an interceptor if you are a hospital or any type of property that has an in-house kitchen operation.Traps and interceptors are required to be emptied by a licensed sanitation company.

Interceptor vs Grease Trap?

Even the most common term is “grease trap” an interceptor is different in size and usage.  The trap is smaller , it uses approximately a 20-50 gallon tank installed under a sink. The interceptor is much larger and it handles 250-5,000 gallons. The interceptor is a concrete tank installed underground.   A clean out pipe is installed to clear out clogs with interceptors.  A Technician can clear out clogs with a tool such as a stick to remove clogs. The interceptor will have a manhole cover outside where the interceptor is located. For more information on traps and interceptors, you can visit the Texas Commission on Environmental Quality Grease Traps.

 

Corona Virus and Commercial Real Estate

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Corona Virus and its near term affects on Commercial Real Estate

As we go on hold like everyone else, there is most likely a question about corona virus and commercial real estate. For starters, we can run comparisons with former virus outbreaks. We are all concerned how this will affect our business. Uncertainty is not healthy for anyone be it an investor, large corporation or small business owner. in the past during flu outbreaks, the commercial real estate market did contract. Once the risks disappeared, the commercial real estate market rebounded on average within 3 to 6 months.  With more people having to say home from work with less interaction, some may wonder how long will this last? Let’s face it nobody really knows how long it will take to have a vaccine ready.  Moving forward , it is reasonable to feel this will last for at least another month or two.  Human vaccine trials are happening right now, just announced today. 

Fundamentals

Fundamental forecasts still predict economic growth because this is not a financial crisis yet. Slow down, yes there is no doubt business has been slowed to halted due to the virus outbreak.  Values on your property is about supply and demand, as we come out of this situation and your property is valued high perhaps you should sell. If this situation exists for a few months buyers may have opportunities to purchase. It is too speculative to define it one way or the other. The FED will backstop  financial markets, this will temporarily hold the market steady just like it did for the financial crisis and keep lending rates at zero.

For Businesses that Lease Property

Virus and commercial real estate leasing situations. If you are a tenant and lease commercial real estate, what should you do? It can be very tough running a business with mandatory closures obviously. Ask your landlord if they will give you an abated period or a “discounted” period. The worst they can say is no, however Landlords do not want multiple businesses falling out of their properties.  As a tenant, especially if you have a good pay history, your landlord could be more accommodating.  Bottom Line- “ask”. For some of you , you can ask a commercial real estate attorney to review the “Force Majuere” provision in your lease. Also, if you have business interruption insurance you can review your policy to see if you do have coverage under this policy. Moving forward perhaps down the road, you should look at some type of business interruption insurance, however make sure it provides some coverage that is reasonable.

Touring and discussions about property during virus issues

With the internet , teleconferencing and virtual tours it is possible to discuss potentials and potentially tour commercial real estate online. Virtual tours have to exist for a realistic tour online. For commercial real estate this is not as popular as the residential real estate industry.  Shire Commercial is familiar and can use these technologies to help our clients thru this situation.

 

Commercial Real Estate Transactions

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Avoiding problems with Commercial Real Estate Transactions

How can you avoid issues with Commercial Real Estate transactions? There are some fairly straightforward tips that can help you stay on track. Let’s start with some questions:

  1. Is this your first commercial real estate transaction? If the answer is yes, then hire a broker or agent that specializes in the type of property you need.
  2. Is this an investment purchase, an owner user purchase or a lease transaction?
  3.  Are you a cash buyer or one that needs financing?
  4. Does your company have good credit ?

Next Steps

We can take each number above and broaden it here for next steps. Number one, you should go with a “specialist”.  Why? Because a specialist will have a better working knowledge about properties than a generalist. Generalists will take any type of deal that comes their way. Specialists do just that, specialize in specific properties.

Number two- There are several types of investment purchases. STNL’s ,  Multi-tenant properties, Properties to be re-purposed, Medical properties, Retail etc. You will want to have a good idea of which type of property best suits your needs.  You can read more about STNL’s here.

Number three- Alot of clients do not have their financing approved pro-actively. This applies to folks that are not cash buyers. The first rule of thumb is you should have a conversation with your lender. Ask your lender how much financing can you be approved for based on your financials.  This will allow you to focus in on specific target properties that fit your budget. Without money, everything becomes an exercise in futility.  For efficient results, have your financing approvals in order.

Number 4- Specifically for lease transactions, you want to have solid credit. What is solid credit? Credit scores of 700+ are a good starter. In addition to your credit score , you must have “liquidity”. Liquidity in this discussion is your company’s ability whether it is old or new to be able to pay rent. How long should you be able to pay rent? At least 18 months without any substantial growth is a good rule of thumb.

Commercial Transaction IssuesCommercial Real Estate Broker in Austin

Transaction issues occur when there is not enough preparation. They can also happen if communications are not clear and concise. Along the way, are you and your broker sharing all of the details? There is nothing worse than getting to the 2 yard line and an “Oh by the way” comes up. You will want to make sure everything is disclosed so that you have a seamless experience. Some brokers may ask for retainer fees if you want to start a new development. The retainer fee should be completely refundable or deducted from commissions if you close. You should also make sure a retainer fee is not just a fee for a broker to make money and not work for you.  Having a good commercial real estate attorney is something a broker can recommend to you. If you already have an attorney, you can utilize them if there are any contractual issues.